If you need to pay for something for your business you may need to borrow money in order to do so. There are two basic varieties of loans for small businesses; the first is a secured loan which is backed by a specific asset, the second is an unsecured loan which is lent to you based on your credit worthiness and other factors. We will be discussing some of the differences between these two loan types in today’s article.
Interest rate: secured loans will typically have lower interest rates than those of unsecured loans. The reason behind this is that there is less risk involved for the lender. In the event that you are unable to make your payments they are able to recapture the asset which backs the loan in order to recoup their loss. Unsecured loans on the other hand have higher interest because there is nothing other than your reputation backing the loan.
Getting approved: approval for secured loans is typically somewhat easier but this also depends on the scale of the loan. Securing a $10,000 loan with an asset such as some piece of equipment versus obtaining a 10,000 loan that is not secured it will be easier to get a secured loan. If however you are securing a loan for a large purchase such as office space then there’ll be other requirements. Typically in either case you will have to demonstrate your ability to repay the money which you are borrowing. Also you will have to demonstrate your credit worthiness through your credit report and score. It is important to note that this way based on your businesses credit score and not on your personal score. bAlso it is not uncommon to review your extensive business history to understand your long-term viability.
Penalty for late and nonpayment: the standard penalties for late or nonpayment will be the same for both unsecured small business loans and secured loans. The obvious exception to this is that if you do not make payment for an extended amount of time secured lenders have the legal right to repossess their asset in order to pay back the loan.
So in conclusion, there are some advantages and disadvantages to each type of loan. Secured loans have lower interest and are typically easier to get approval for. Unsecured loans on the other hand are more expensive and require more credit worthiness in general but you do not need to back them with a specific asset in order to get funded.